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Saturday, 1 August 2015

Gold has been a
valuable and highly sought-after precious
metal for coins, jewellery,
and other arts since long before the beginning of recorded history.
Running into 2015 for past couple of decades gold process have been showing a
consistent positive trend making it a safe bet to invest. Up until the end of
2013 and early 2014 gold was looked upon as the most sought after asset class
as a form of Investment. Then, gold had touched almost INR 32,000 per 10 grams,
rumours were spreading that gold in near future will touch the level of INR
50,000 per 10gms of gold. Many fund houses
even started with an IPO based on this a new found class: GOLD, on the
expectations that gold will rise and give steady but decent returns.

Soon after, gold
prices started to fall. To one’s dismay,
gold has now touched an all-time low in past 4yrs of INR 24,000 per 10gms. This extreme fluctuation has now raised many
questions. What led to sudden fall in gold prices? Is gold indeed an Investment to be trusted
upon? Will gold prices rises in
future? According to a school of thought
which says this might be created by China to help them store huge quantity of
gold, is that true?

To answer the
above question we need to understand why the gold prices rose in the first place. It is observed that gold rates are inversely
proportionate to the overall financial stability of the world but majorly to
American economy. The price of the metal
is also determined by its own demand and supply. Towards the end of 2008, the American economy
was hit by the sub-prime crises and the so called Housing bubble, leading to
recession in American economy, thus increasing the investor’s faith in this
yellow metal. Also the economic problems
in euro zones and with countries like Spain and Greece led to more panic across
the countries in world for future wave of depression. Thus, many countries including China started
to buy and hoard the yellow metal, thus increasing the demand of gold vs the
expected shortage of gold.

As gold being a
metal that needed to be unearthed and gold extractions from the mines were
getting deeper, riskier, rarer and hence more expensive. All these factors led to sudden and steep
rise in price of this precious Yellow metal called as “Gold”.

Then, what changed
the fate of rising gold prices? Exact
reversal of all the above factors. The
most immediate factor for the drop in prices is strengthening of dollar. Gold
is priced in dollars so if the dollar goes up investors marks down the yellow
metal. Dollar is rising because the
American economy is on its revival mode and stabilizing from the recession it
earlier hit. The interest rates in
America were increased. The higher
interest rates increase the opportunity cost of holding the zero yield assets,
thus the money that is otherwise tied up in the bullion investments will earn
more return if invested in a treasury bill or other debt.

The good
political news in euro zone also had an impact on gold rates. The reduced chances of messy default by
Greece and hence the break-up of the single currency increased the confidence
in Euro leading to the fall in demand for gold.
Another expectation amongst gold fans was that the Chinese govt. who
wanted to make yuan a reserve currency would stock up and hoard hefty levels of
gold and make its currency creditable, but to surprise China did stock up gold
but only little.

So is it all
right to say that gold is not a safe asset as a form of investment? Well that’s for you all to decide. Investment in any asset should never be
lopsided just because it’s showing great returns in a given time period. Also, investments should be done keeping a
longer time horizon in mind.